The reinsurance market is in the midst of great change. Tens of millions in new capital is flooding into the market.
That is good news for buyers. More money means more choices with new emerging products. Better still, many of the new reinsurance players have a different and a greater appetite for risk.
However, insurers should be cautious, says Marc Lauricella, partner at TigerRisk Partners. The providers of this new alternative reinsurance capital are financially sophisticated and not bound by tradition, he says. They are fond of unconventional approaches and complex structures. They have no need to conform to past practices and their target hurdle rates can be lower than those of traditional rated carriers, due to their business and investment strategy.
“To benefit from this new market situation, insurers will need objective and innovative advice. While the large brokers may tout their ability to think through multiple structures and the various reinsurance capital options, we would argue otherwise,” Lauricella said.
“Thus, the big brokers will take the easier route and will push for some price decrease while renewing the existing structure/products with only minimal consideration of the optimal reinsurance structure options,” he said.“The goal should not be just to reduce price but to determine the best reinsurance cover with the most efficient reinsurance capital—traditional markets, collateralised markets, cat bonds, etc.” He said the ability to make the most of this new reinsurance money requires a specialist broker just as smart and sophisticated as their capital markets counterparts. “Executing transactions with the new reinsurance capital providers requires starting with a fresh piece of paper; developing creative solutions that are right for the client; and the willingness to allocate the long hours to fashion a deal beneficial to all parties,” he said. “Most importantly, insurers must partner with brokers whose interests are aligned with theirs.”He notes that with broker consolidation now approaching what he describes as “absurd” levels with more than 80 percent of reinsurance premium passing through just three brokers, the interests of the big brokers aren’t necessarily aligned with those of clients. With little chance of growing organically, the big brokers focus on maximising revenue and cutting expenses, he claims.